Specialist secondaries firms consumed portfolios cut adrift by investment banks following the dotcom crash but they have since had to be more creative in the way they source deals.

Julian Mash, Vision Capital: We are not reliant on cyclical bank behaviour

In an increasingly crowded market, firms are having to develop innovative strategies for finding deals. Some have broadened their geographical footprint, while others have honed their skills at home.
Secondaries firms can be divided into two categories: those that buy and sell stakes in private equity funds and those that acquire fund portfolios or parts of them. The first category is characterised by intermediaries, with businesses like Triago-X helping to introduce institutional investors wanting to exit fund investments to buyers looking to tap into those funds.
It is the other type of secondary deal, sometimes known as the synthetic secondary, that was so popular in the aftermath of the dotcom bubble. Banks that rushed to invest in technology companies through their private equity and venture capital units at the height of the bubble could not unload them fast enough when it burst. Some secondaries firms found value in this seemingly worthless wreckage.
Although portfolios come on the market – last month, Pantheon Ventures, which has diversified from a funds of funds manager into secondary deals, acquired the portfolios of Cdb Web Tech, a technology-focused fund of funds and direct technology investment manager – such wholesale disposals are rare.
Vision Capital has pioneered a model that offers a one-stop shop for private equity funds, buying mature portfolios. Julian Mash, chief executive, said it was trying to pitch to a wider range of private equity clients. “We bought portfolios from financial institutions in the past but we don’t focus purely on big institutions for dealflow. We are not reliant on cyclical bank behaviour – we target a wider group, which includes semi-independent private equity firms like Legal & General Ventures and corporates, together with a range of other investors,” Mash said.
With Legal & General Ventures, Vision acquired a portfolio of seven companies for £120m (€177.6m) last year. “It wanted strategic clarification and by buying its portfolio, we helped it to focus on its new investment strategy,” said Mash.
Hugh Stewart, chief executive of Strathdon Investments, a specialist technology investment firm, divides opportunities into two types. “First, you have a successful seller that wants to focus on a core business, rather than their less profitable units. Often, a firm will want to tidy up its old fund, which may have a couple of companies left in the portfolio that make little difference to carry but are time-consuming to manage. A secondary enables a firm to concentrate its efforts on raising and investing a new fund,” said Stewart.
But less promising situations can also yield deals for a cautious and diligent secondary investor. “The second situation is the opposite – something has gone wrong. Firms can sometimes stray from their mandate by getting into venture or a particular market where they have insufficient expertise, so a secondary can help them re-focus,” he said.
Whatever type of deal firms are looking for, they have had to work harder to get them. Secondaries specialist Coller Capital has developed a global network. Susan Flynn, a partner at the firm, said: “We are one of the largest, multinational teams in the secondaries field. Working on that scale helps us to sustain dealflow and serve sellers across the spectrum.”
Knowledge of private equity fund portfolios and their managers also helps when sourcing deals, she said. “We try to keep abreast of developments in the market and understand sellers’ changing needs,” she added.
Other firms have focused their efforts on under-exploited parts of private equity. Strathdon Investments last month launched a listed secondaries fund that will invest in venture capital portfolios. “I’ve been keen to establish a secondaries fund for a while. A number of our existing investments were made through secondaries, which are not new to us,” said Stewart.
Secondaries can benefit the manager and company or companies being sold. Investment horizons for private equity typically extend to about five years, so further investment is often needed to develop an early-stage business. In the area of investment Strathdon is aiming at, such follow-on investments merge into secondary buyouts.
“Our strategy will be split between value plays with companies that have gone off the boil and more typical early-stage technology businesses, where we can drive the businesses,” said Stewart.
Vision Capital’s approach to origination is based on building contacts. “Ours is a relationship-based approach. The best deals for both parties come from highly collaborative discussions and building relationships,” said Mash.
Strathdon adopts a similar approach, based around forging links with the intermediary community. “We’ve been around for a while and have developed a good network of contacts,” said Stewart. “Having a fund incentivises intermediaries, as we will have steady dealflow due to the evergreen nature of the capital. Investors in private equity funds know what’s left in the portfolios, so they will also approach us with ideas.”
For now, there seems to enough business around for all the players. Flynn is bullish. “Dealflow is buoyant. There is a steady flow of fund portfolios coming to market. Sellers are taking advantage of the high pricing – it makes sense for them to realise assets when pricing is attractive,” she said.
Despite this, some in the industry, such as Stewart, warn that more portfolio disposals are unlikely. “I don’t foresee a wave of secondaries on the scale of the post dotcom bubble sell-off. Investors are more circumspect this time, so you won’t see a mass exodus away from venture like before,” he said.
If he is right, the increased numbers dabbling in secondaries deals will be hoping their efforts to adapt to changing market conditions and carve out their own niches will protect them if the fat years become lean again.